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CNPC, Iraq Revive 1996 Oil Field Contract

09-25 11:38 Caijing Magazine

China's biggest oil company has signed a major service contract with the Iraqi government. But security questions remain.

By staff reporter Yang Yue


China National Petroleum Corp. (CNPC), the country’s largest oil and gas company, has become the first foreign company to sign an oil deal with Iraq since the U.S. invasion in 2003.


The US$ 3 billion contract with the Iraqi government, signed August 28, sets terms for developing the country’s Adhab oil field. The deal also marked the revival of a 1996 contract between CNPC and the Iraqi government that had been cancelled by the war.


In addition, CNPC set up a joint venture with China North Industries Corp. for the project.


Although CNPC agreed to more pro-Iraq concessions in the latest contract than in the 1996 agreement, analysts consider the long-awaited deal a good start for the Chinese company as it seeks to tap into the recovering, oil-rich country.


“The first thing is to find a foothold and then to seek expansion in the market,” said Yin Gang, a researcher with the Institute of West Asian and African Studies at the Chinese Academy of Social Sciences (CASS).


Contract Revival


Oil was discovered in Adhab, in southern Iraq, in 1979. The field has proven reserves of about 1 billion barrels.


According to the 1996 agreement, CNPC would invest up to US$ 1.3 billion to develop the field. The contract was to be valid for 23 years, with a daily crude production target of about 90,000 barrels.


A source familiar with the latest deal told Caijing the Chinese side has set an annual production target of 5 million tons, which is considered “a huge amount.”


At the moment, the United Nations has given Iraq permission through its “oil for food program” to export US$ 2 billion worth of oil every year, in exchange for food and medicine. Thus, the Iraqi government has been eager to find foreign investment for oil projects.


When the CNPC contract was signed in 1996, then-Iraqi Oil Minister Amir Muhammad Rasheed said “the contract could be implemented as early as tomorrow.” Clearly, he was too optimistic. The 2003 war halted the deal.


But in October 2006, when Iraq’s current Oil Minister Hussein al-Shahristani visited China, the two sides revived their talks on the Adhab project.


During a state visit by Iraqi President Jalal Talabani to Beijing in July 2007, Shahristani told Caijing he expected “to reach an agreement with Chinese side about the Adhab oil field within one month.” He was off by 11 months.


According to the commercial consulate at the Chinese Embassy in Iraq, the new contract spans 20 years. CNPC holds a 75 percent stake, while the Iraqis hold the rest.


Li Guofu, director of the Mideast Research Center of the China Institute of International Studies, told Caijing that the new agreement is unlike the 1996 contract, which allowed production sharing. The latest deal is a “technical service contract” with compensation based on pre-set service fees.


CASS’s Yin said a service contract is not as risky as a deal that includes production access, even though current international oil prices are high. He said most western oil firms are not content with earning service fees alone, which helped CNPC win the deal.


Iraq has proven oil reserves of 115 billion barrels – the world’s second largest after Saudi Arabia. Between the end of the 1988 Iran-Iraq War and the start of the Gulf War in 1990, Iraq’s daily oil production reached an average 3.5 million barrels, peaking at more than 4.5 billion barrels.


But the Gulf War destroyed almost all the country’s oil industry infrastructure, and daily production slumped to around 300,000 barrels. In December 1996, under a UN Security Council resolution, Iraq’s oil production started to recover. Now the country’s current daily oil production has reached 2.65 million barrels and is expected to reach 3 million barrels by the end of the year.


Shahristani said earlier his country expected to produce up to 6 million barrels every day by 2012. To reach the goal, Iraq would need about US$ 20 billion in investment. Thus, the government this year launched bids for oil projects that drew 41 global companies including BP, Exxon Mobil, Total and Shell, as well as Chinese firms CNOOC, CNPC, Sinopec and Sinochem.


Risk Remains


To lure foreign investment, Iraq revised its Oil Law and set the return ratio for foreign oil investment at 20 percent – higher than the international standard of no more than 15 percent. Yin said the law is seen as “most beneficial for foreign investors,” but it has been suspended due to opposition in Iraq, forcing the Iraqi government to sign only service contracts with foreign investors.


A key concern is the delicate security situation in Iraq. The Adhab oil field is located in the Wasit province south of Baghdad, which is under Shiite control.


Li said risks are inevitable for oil projects in Iraq. And although the security situation has stabilized, he said, “the stability is very fragile.”


One Chinese worker in Baghdad told Caijing the probability of a major religious conflict in the region is low, but admitted sporadic armed conflicts among different Shiite groups could be expected.


A Chinese source with the Adhab project said that, in addition to balancing the interests of different religious and ethnic groups in Iraq, the government must consider relations with bordering countries. Thus, the source said Iraq could be expected to invite more Chinese and Russian firms to join oil projects.


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